Operational Feasibility

This is being done to gain an understanding of whether the proposed system will
likely solve the business problems, or take advantage of the opportunities or not.
Operational feasibility means that a proposed system will be used effectively after it
has
been developed.
Areas to be assessed:
❏
Project Size – number of users
❏
IPO – inputs, processes, outputs
❏
Management support
❏
Environment assessment – are the users going to change
Questions that needs to be answered:
❏
Will the new system result in a workforce reduction?
❏
Will performance decline in any way?
❏
Will an overall gain to the organization outweigh individual losses?
❏
Will customers experience adverse effects in any way?
❏
Will any risk to the company’s image or goodwill result?
3.
Technical Feasibility
Technical feasibility refers to technical resources needed to develop, purchase,
install, or operate the system. Includes evaluating the ability of computer hardware
and
software to handle workloads adequately.
Questions to be answered:
❏
Does the company have the necessary hardware, software, and network
resources? If not, can those resources be acquired without difficulty?
❏
Does the company have the needed technical expertise? If not, can it be
acquired?
❏
Does the proposed platform have sufficient capacity for future needs? If
not, can it be expanded?28
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4. Economic Feasibility
Economic feasibility is a method for evaluating the effectiveness of a new system.
Its procedure is to determine the benefits and savings that are expected from a
candidate
system and compare them with costs, called cost-benefit analysis.
Cost -Benefit Analysis
The purpose of a cost/benefit analysis is to answer questions such as:
1.
Is the project justified (benefits outweigh costs)?
2.
Can the project be done, within cost constraints?
3.
What is the minimal cost to attain a certain system?
Types of Benefits
Benefits may be classified into one of the following categories:
a.
Monetary -- when monetary values can be calculated;
b.
Tangible (Quantified) -- measured in monetary terms or in tangible assets
(reduced costs, assets not spent on);
c.
Intangible -- have significant impact on the company (time saved,
productivity, efficiency, data accuracy)
Types of Costs
1.
Project-related costs
❏
Development and purchasing costs;
❏
Installation, training and conversion costs.
2.
Operational costs (on-going)
❏
Maintenance: hardware, software, facilities
❏
Personnel: operation, maintenance.
3.
For a small business that wants to introduce a PC-based information
system, these cost categories amount to:
❏
Project costs: purchase hardware, software, furniture; customize
software, train, install, file conversion
❏
On-going costs: operating the system (data entry, backups, helping
users, vendors etc.), maintenance (software) and user support,
hardware and software maintenance, supplies,...
Accounting Methods
The two techniques to measure the economic feasibility are the following:
1.
Payback Analysis
It determines the amount of time required (usually in years) for an
investment to generate sufficient cash flows to recover initial cost.
a. Averaging Method - even cash inflow
Example 1. Eselyu Corp. is planning to implement a new system by
acquiring both new hardware and software packages. The cost of
investment is estimated to be at Php 400,000. Annual maintenance and
licensing costs are estimated to be at Php 35,000 but the estimated
annual benefits are at Php 115,000. How long would it take for Eselyu 29
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transmitting in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written
permission of SLU, is strictly prohibited.
Corporation to recover their investment?
Solution:
Annual net cash inflow = 115,000−35,000 = Php 80,000.00
Payback period = 400,000/80,000=5 years
Meaning, it would take 5 years before Eselyu Corporation recovers its
investment. Hence, Eselyu Corp will start taking profits from its
investment after 5 years.
b.
Subtraction Method - uneven cash inflow
Example 2. Eselyu Corp. is planning to implement a new system by
acquiring both new hardware and software packages. The cost of
investment is estimated to be at Php 400,000. Earnings from the
investment starts at Php 55,000 and increases by Php 30,000 every year.
When will Eselyu Corp. recover its investment?
Solution:
Payback Period is at 4 years. That is, it would take 4 years before Eselyu
Corp. recovers its investment. In other words, Eselyu Corp will start taking
profits from its investment after 4 years.
2.
Return on Investment Analysis (ROI)
It is a percentage rate that measures profitability by comparing the total net
benefits received from a project to the total costs. It shows investors how efficiently
each dollar invested in a project is at producing a profit.
Where:
❏
Net profit should be determined through communication with the company
(Estimated sales/revenue –Operating Cost)
❏
Total Investment should be determined through the economic feasibility
Example 3. A company’s newly acquired information system cost them about
Php 1,250,000. At the end of the information system’s life cycle, the company
experienced a total revenue of Php 1,950,000. What is the return on investment?
Solution:
Net profit = Revenue − Cost
=1,950,000−1,250,000
Net Profit=PhP 700,000.00
Return on Investment (ROI) = (700,000/1,250,000)100%=56%
NOTE: Companies usually have a minimum ROI goal for a particular project. In
the feasibility stage of a project development, the expected ROI is identified. The
actual ROI can only be determined after the lapse of the use of the project when